China: NDRC Standardizes Private Equity Funds Filing System

Following the promulgation of the Notice on Further
Regulating the Administration of Development and Filing of Equity
Investment Enterprises in Pilot Areas (the "Pilot
Rules") by the National Development and Reform
Commission (the "NDRC") on 31 January
2011 and positive feedback from the six pilot areas, the NDRC is
now determined to apply its administration and filing system to
equity investment enterprises ("EIEs")
across the nation.

On November 23, 2011, the NDRC promulgated its first set of
nationwide rules on the administration of equity investment
enterprises, the Notice on Promoting Regular Development of
Equity Investment Enterprises (the
"Notice"). The main objective of the
Notice is to standardize the establishment and operation of private
equity funds. This Notice evolved from the Pilot Rules and has
addressed five major topics. Together with the Notice, the NDRC
also issued a set of forms for filing and guidance for EIEs'
constitutional documents (i.e. guidance on articles of
association/partnership agreement of EIEs, guidance on the fund
raising prospectus, etc.).

Establishing a Nationwide Filing System

While the Pilot Rules only applied the filing requirement to
EIEs with a capital amount of RMB 500 million or above, the Notice
has removed this threshold and subjects all equity investment
enterprises to filing. Existing EIEs are required to file within
three months of the promulgation of the Notice (i.e. November 23,
2011) and newly-established EIEs should file within one month of
completing their registration with the Administration for Industry
and Commerce, unless:

the EIE has registered as a venture capital enterprise pursuant
to the Interim Management Measures on Venture Capital Enterprises;
or

the EIE is funded and established by a single entity or natural
person, or by two or more investors that are wholly-owned
subsidiaries of the same entity.

The filing authority is divided into two levels depending on the
scale of the EIE:

for capital equal to or more than RMB 500 million or its
equivalent in foreign currency (including paid-in capital and
committed capital), filing should be made with the NDRC, which
takes up to 40 working days; and

for capital less than RMB 500 million or its equivalent in
foreign currency, filing should be made with an authority appointed
by the provincial government (we believe that such filing authority
will usually be the provincial counterpart of the NDRC), which
takes up to 20 working days.

The Notice itself does not impose substantial sanctions for
failure to follow the filing requirements (the only sanction
provided in the Notice is that the NDRC will publicly announce
non-compliant EIEs). However, we understand that, in practice,
negative consequences may include being prohibited from investment
by social security funds and possibly underlying pressure and
constraints from the government during its operation and for
establishment of new funds in the future.

Regulating the Establishment, Fund Raising, and Investment
Operations of EIEs

The Notice provides that EIEs may take the form of a limited
liability company, a company limited by shares or a partnership by
following the PRC Company Law or PRC Partnership Law. The capital
of an EIE may be committed capital to be paid in installments
during the operation of an EIE according to its articles of
association or partnership agreement.

Fund raising of EIEs is restricted to private placement to
qualified investors capable of risk assessment and tolerance.
Solicitation to unspecific investors via public channels, i.e.
through media, seminars, text messages, etc., and promising a fixed
return is forbidden. EIEs investment is limited to equity of
non-publicly-traded companies and unused cash should either be
deposited in banks or be used to purchase investment products of
fixed income such as treasury bonds.

Improving the Risk Control System

For risk control purposes, the Notice prohibits an EIE from
providing a guaranty to companies other than those it invests in
and provides that affiliated parties must refrain from voting for
an EIE's investment in affiliated enterprises. The Notice
further provides that assets of EIEs should be entrusted to an
independent custodian institute, unless all investors agree to a
waiver of such entrustment. Where the entrusted management
institute of an EIE is a foreign invested company, assets of such
EIEs must be entrusted to a custodian institute with independent
legal status in the PRC.

Clarifying Basic Duties of an Entrusted Management
Institute

The Notice requires that, where EIEs adopt the form of entrusted
management, the entrusted management institute should prepare and
implement the investment plan, manage invested enterprises, provide
such enterprises with value-added services, disclose to the EIE
relevant operational information, and prepare accounting statements
and reports to EIEs. If the entrusted management institute acts
against the interests of investors (i.e. using the EIEs' assets
for the benefit of a third party), investor may request the
entrusted management institute to resign.

Establishing EIEs' Information Disclosure System

The Notice requires EIEs provide investment operation
information to investors as well as submit annual business reports
and audited finance reports to the filing authority within four
months of the end of each accounting year and report to the filing
authority any of the following significant events during its
operation within 10 working days from its occurrence:

amendments to the articles of association, partnership
agreement or entrusted management agreement of the EIE or entrusted
management institute;

increase or decrease of the capital or external financing of
the EIE or entrusted management institute;

division or merger of the EIE or its entrusted management
institute;

alteration of custodian institutes or entrusted management
institutes including senior management changes or other material
changes; or

dissolution or bankruptcy of the EIE, or the EIE's assets
having entered into receivership.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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